Daily analysis 11.02.2016

A sudden strengthening of the yen. Why were the markets disappointed with Janet Yellen's speech? Riksbank cuts interest rates to negative 0.5%. The zloty is again under pressure of risk aversion, and the EUR/PLN goes to the level of 4.45.

Most important macro data (CET – Central European Time). Estimations of macro data are based on Bloomberg information, unless marked otherwise.

14.30: Weekly jobless claims in the USA (estimations: 280k).

16.00: Janet Yellen's testimony in the Senate.

Fear returns to the markets

Yesterday, the market finally decided how to interpret Janet Yellen's testimony before the American Chamber of Representatives. Initially, the dollar was gaining value due to the suggestions of sustaining the perspective of monetary tightening, despite quite a negative picture of the foreign economy's condition, and especially the danger coming from China.

There were also not enough dovish elements during the questions and answers session that could sustain the growth on the stock markets. The Fed chairwoman did not send an advantageous dovish sign, by answering the question regarding interest rates. She claimed that she does not expect that, “the Fed will be forced to decrease them to zero again, although the monetary policy is not at a steady course”.

Additionally, Yellen claimed that she wants to be, “cautious in coming to quick conclusions,” regarding the current disturbance on the markets. As a result, the American stock markets finished the session at unchanged levels, despite the previous growths by more than 1%. Also, the EUR/USD returned to the area of 1.13.

The markets were probably waiting for a suggestion from the Fed that the current market and economic situation will most likely stop the process of monetary tightening. However, the market's impression was that the Fed wants to continue the hikes, despite a clear deterioration of the global sentiment, and will possibly withdraw too slowly from the projections presented in December.

Today's behavior of the wide market is a certain consequence of yesterday's events. During the European session, the yen suddenly strengthened, the oil dropped to its most minimum levels in many years, and the European stock markets experienced a 2-3% decrease. The reaction of the dollar is not that unambiguous. It loses to the main currencies, but gains to those from emerging countries, especially those that export raw materials.

Today, Janet Yellen will appear in the Senate. However, there is a small chance that the Fed chairwoman will change to a more dovish message by suggesting a pause in the monetary tightening.

Once again Riksbank surprises economists

Only 3 out of 18 economists surveyed by the Bloomberg agency expected that the Riksbank would decide to cut interest rates by 15 bp to negative 0.5%. The rest thought that the monetary policy would remain unchanged (8), or decrease by 10 bp (7).

The Swedish monetary authorities are mainly afraid of, “a growing risk of the weakening of expectations regarding inflation's target”. However, if we look at the current economic indexes and macroeconomic projections, we will not be able to observe any significant problems. In 2015, the GDP increased by 3.7%, investments increased by 7.3%, unemployment dropped by 0.5%, and salaries increased by 3.3%. Similar trends are to be observed in the succeeding years.

Of course, inflation remained near the level of zero. However, the same situation was also observed in other developed economies, due to the decreasing prices of raw materials. Riksank is not hiding that it is afraid of the strengthening of their local currency (SEK), which could decrease at the pace at which inflation would reach its target.

Moreover, Riksbank claims that it is, “ready to continue decreasing interest rates, and intervene on the currency market”. Still, the announcement looks very dovish once again, as this time 2 out of 6 members refused to continue decreasing interest rates.

Additionally, an extremely mild monetary policy creates a strong demand on the real estate market. During the past 20 years the prices of real estate in Sweden are growing almost constantly. For a decade, the average price of a house doubled, and in two decades it quadrupled.

However, everything suggests that Riksbank will continue a very mild monetary policy, and will not hesitate to decrease interest rates more if the pressure for deflation is sustained. Additionally, if the EUR/SEK goes near the area of 9.20, the monetary authorities are most likely to intervene in the currency market, or increase the purchase of assets.

Riksbank's decision can be partially caused by expectations regarding the further monetary tightening by the ECB. Thus, it is possible that when the situation on the global market calms, this hint may appear within the main currency pair.

Zloty is hesitating

At the close of yesterday, the zloty definitely gained more in relation to the main currencies than, for example, the Hungarian forint. Today, however, the whole increase has been corrected, and brought the EUR/PLN to the level of 4.45. These sudden changes confirm a significantly lower resistance of the PLN to the external dangers, after the S&P downgraded the Polish rating.

The national events may also have a negative impact on the zloty. Before noon, Bloomberg informed that, “the Polish minister of finance left the meeting with the media, due to discussions regarding his resignation”. If there really are changes in the ministry of finance, we can expect a clear increase in the pressure on the zloty. The EUR/PLN could even go to the level of 4.50. This would also increase the market's anxiety regarding problems with sustaining the deficit of the public finances sector below the level of 3% GDP, especially in 2017.

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without the written permission from Cinkciarz.pl Sp. z o.o is prohibited.

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